As we approach the final weeks of 2025, the U.S. healthcare sector has transitioned from a defensive stalwart to a primary market leader. Evidently, while the S&P 500 has delivered a solid return of approximately 15% year to date, the U.S. healthcare index has been consistently challenging this benchmark, with specific sub-sectors like biotechnology outperforming the broader market by significant margins. Notably, the S&P 500 Biotechnology industry index has rallied 23.2% so far this year.
This dynamic has positioned top U.S.-focused healthcare exchange-traded funds (ETFs) offering a strategic blend of high-growth potential and recession-resistant stability, making them an essential addition to portfolios before the year-end.
However, before recommending any healthcare ETF for inclusion in your portfolio and delving into their specifics, it is important to examine what has driven the sector’s rally and assess whether it is sustainable. This analysis should help you make a more informed investment decision.
The U.S. healthcare sector’s performance so far this year has been driven by distinct, powerful trends:
• Breakthrough Innovation and GLP-1 Adoption: A historic innovation cycle, particularly in anti-obesity and related cardiometabolic drugs (GLP-1s), created multibillion-dollar market opportunities and revitalized investor interest across the healthcare ecosystem, from pharmaceutical developers to medical device and diagnostic companies.
• Technological Integration: The practical application of Artificial Intelligence (AI) is moving beyond hype, enhancing clinical documentation, drug discovery and administrative processes. In particular, American biotech firms have successfully integrated autonomous AI systems to slash drug discovery timelines, which significantly boosted profit margins.
• Defensive Demand and Demographic Tailwinds: The sector’s non-cyclical nature provides a buffer during economic uncertainty. This is underpinned by the long-term, structural demand from an aging U.S. population, which ensured steady growth in healthcare utilization and spending.
• Solid Earnings Beat: A JP Morgan report, published in early December, mentioned that the healthcare sector’s relative earnings revisions breadth, which measures the balance between upward and downward analyst estimate changes, has stabilized. Companies in the sector beat third-quarter estimates by 13%, well above the broad market’s 7%, representing the highest beat rate in at least two years.
• Solid M&A Activities: A wave of strategic acquisitions, fueled by private equity and large-cap pharma cash reserves, revitalized the healthcare sector this year. Examples include Johnson & Johnson’s JNJ $14.6 billion acquisition of Intra-Cellular Therapies and Pfizer’s PFE purchase of obesity drug maker Metsera for up to $10 billion following a competitive bidding process.
As we are set to enter 2026, the healthcare sector’s growth is expected to continue, led by non-acute care settings like ambulatory surgery and home health, value-based care models, and health services technology. Strategic mergers and acquisitions are likely to accelerate as companies seek scale and new capabilities.
With an aging population, increasing healthcare spending and the FDA on track for record approvals, the sector is primed for sustained outperformance in 2026.
However, the sector must navigate persistent challenges, including workforce shortages, rising costs, ongoing regulatory scrutiny as well as tariff impacts (with 39% of executives surveyed by Deloitte expecting them to affect their 2026 strategies as per a Forbes report).
For investors, the aforementioned complex landscape makes diversified exposure through ETFs a prudent strategy. It mitigates the risk associated with any single company’s drug trial or regulatory decision while providing access to the sector’s growth themes. With this in mind, here are three healthcare ETFs, with a major focus in the U.S. market, that offer distinct strategic approaches for the coming year.
State Street Health Care Select Sector SPDR ETF XLV
This fund, with assets under management (AUM) worth $40.28 billion, offers exposure to 60 U.S.-based health care equipment and supplies; health care providers and services; biotechnology; life sciences tools and services; and health care technology companies. Its top three holdings include U.S.-based pharmaceuticals, Eli Lily LLY (15.11%), JNJ (8.83%) and AbbVie ABBV (7.12%).
XLV has gained 14.1% year to date. The fund charges 8 basis points (bps) as fees. It traded at a volume of 8.57 million shares in the last trading session and sports a Zacks ETF Rank #1 (Strong Buy).
Vanguard Health Care ETF VHT
This fund, with net assets worth $17.7 billion, offers exposure to U.S. companies within the health care sector. Its top three holdings include LLY (12.39%), ABBV (4.85%) and JNJ (4.42%).
VHT has rallied 15.3% year to date. The fund charges 9 bps as fees. It traded at a volume of 0.38 million shares in the last trading session and sports a Zacks ETF Rank #1.
iShares U.S. Pharmaceuticals ETF IHE
This fund, with net assets worth $841.4 million, offers exposure to 55 U.S. companies that manufacture prescription or over-the-counter drugs or vaccines. Its top three holdings include LLY (23.67%), JNJ (21.93%) and Bristol Myers Squibb BMY (4.64%).
IHE has surged 32% year to date. The fund charges 9 bps as fees. It traded at a volume of 0.76 million shares in the last trading session and carries a Zacks ETF Rank #2 (Buy).
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Bristol Myers Squibb Company (BMY) : Free Stock Analysis Report
Johnson & Johnson (JNJ) : Free Stock Analysis Report
Pfizer Inc. (PFE) : Free Stock Analysis Report
Eli Lilly and Company (LLY) : Free Stock Analysis Report
AbbVie Inc. (ABBV) : Free Stock Analysis Report
State Street Health Care Select Sector SPDR ETF ETF (XLV): ETF Research Reports
Vanguard Health Care ETF (VHT): ETF Research Reports
iShares U.S. Pharmaceuticals ETF (IHE): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).
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